Richard Lambert can see for himself the hole into which public money is being poured. Outside the CBI's offices in London's Centre Point, excavation work is under way on the £16bn Crossrail project to link Heathrow to the City and Canary Wharf. The leader of Britain's premier employers' organisation approves of the infrastructure project, but it's the black hole in the state's finances that troubles him.

With the latest figures out showing plunging tax receipts and rising spending, Lambert says the CBI wants Alistair Darling to be tougher in bringing the deficit down. "I felt the March budget was a bit of a cop-out. It didn't spell out a sustainable path for the public finances. The size of the structural deficit required more urgent action."

However, the former editor of the Financial Times has been around long enough to know that his call is unlikely to be heeded in an election year. But while urging that the government extend its car scrappage scheme until after the election, he argues neither Darling nor his Tory shadow, George Osborne, will be able to ignore the fiscal arithmetic for much longer. "We need to be more ambitious," he says ahead of next week's annual CBI conference. "There is not as much difference between the government and the Conservative party as the spinners would suggest."

Lambert was appointed just over three years ago to succeed Digby Jones as CBI director-general. Lord Jones, a rumbustious Midlander, saw it as his mission to put the organisation on the political map and was not afraid of open confrontation with the government. Lambert, previously a member of the Bank of England's monetary policy committee, has adopted a quieter, more consensual approach.

Path to recovery

Next week's conference theme is "roots for recovery", charting the way out of the worst economic downturn since the second world war. Lambert, who had only a few months of calm at Centre Point before the storm broke in the summer of 2007, says many of his members have been clinging on by their fingertips, but now see signs of improvement.

Even so, he is worried about the dearth of finance, particularly for small and medium-sized businesses lacking access to capital markets. The early part of the year was a "really scary time" for CBI members, he said, with confidence shattered by the shock to the global financial system. "Firms de-stocked at a rate never seen before. They slashed investment. Businesses hunkered down and decided to do nothing." His fear now is that the lack of credit will start to bite when demand finally starts to pick up, and that a lack of working capital will lead to insolvencies rising in the early stages of an upturn, as they have in previous recessions.

But the CBI does not believe that uncertainty about the economy's performance should be an excuse for inaction over the deficit. Lambert supports Osborne's argument that a tougher fiscal policy will allow monetary policy to remain looser for longer, thus boosting the chances of a robust recovery.

That's the lesson from the early 1990s," he says. "From 1992 onwards, government spending was heavily constrained. It barely changed at all. But monetary policy was loose and the exchange rate was weak. Growth averaged 3.5% a year."

Lambert said he wanted the deficit to be reduced through spending cuts rather than tax increases. Growth would help to bring down the deficit, as it did in the 1990s, but the scale of the problem was different from during the aftermath of Black Wednesday.

While accepting that squeezing public spending will "not be easy". Lambert says certain broad principles should apply to the period of austerity: current spending should be cut rather than capital spending on Britain's infrastructure, and productivity in the public sector should improve. "There has been a massive increase in real spending – on the NHS, on the police and on everything else – and now is the time to maximise the return on that investment. Public sector productivity has to go up."

With the City heavily represented in the CBI's membership, Lambert rejects calls for root-and-branch reform of the financial system. The call by Vince Cable, the Liberal Democrat Treasury spokesman, for banks to be either utility banks operating in the high street or "casino" banks with a licence to speculate is dismissed as "neither practical nor desirable". The government's plan to rip up the contracts of City financiers if they are given too strong an incentive to take risks gets even shorter-shrift. "It is just flimflam, re-hashing something we already know."

There is also a warning for the City. "Banks operate in a competitive marketplace, but they need to think the following things: It is very important for the capital base to continue to be strengthened, banks should be thinking about their ordinary shareholders, banks need to be FSA and G20 compliant and an election is coming, which means it is an extremely sensitive political time, so they are going to have to be careful."

All to play for

Lambert says that instead of grand-standing, more should be done to strengthen the financial system against another crisis. "There have been moments in the last month or two when it has been like watching a slow motion accident. No politician wants to smash the banks and none of the bankers want to impale themselves, but they can't seem to get out of it."

Calling for beefed-up regulation, Lambert says the "catastrophe in the wholesale banking sector" makes a re-design inevitable. "It is all to play for. The next 15 months will be the key. Most of the game will be in Basle and Brussels. The structural change that matters is building counter-cyclical reserves into bank balance sheets. We need to put more reserves against riskier assets."

The imperative is especially strong for Britain, he adds. "Compared with Germany and France, the UK hit all the coconuts and that brought us recession in the way it has. We had a big financial sector, more important to our economy than theirs, a housing bubble, public finances that were already pretty stretched and consumers that were heavily borrowed. It is not surprising it is taking us longer to get out of it."

Lambert says business has a strong interest in a workable deal on climate change and is worried about the outcome from next month's summit in Copenhagen. "We are not going to get a treaty out of Copenhagen, but we need a strong political agreement. Worthy aspirations are not enough. Everybody is going to have to turn up, including Obama. They need to have something serious to say about carbon emissions over the next 20 years."

He is nervous, however, about Europe's promise to raise its proposal of a 20% cut in carbon emissions to 30%, provided there is a successful deal. "Business is very leery about a 30% cut without something from the other big players. That would be very costly and put us at a competitive disadvantage."

While sanguine about the possibility that the world has passed the point of peak oil, Lambert says the CBI is concerned that action will be needed to prevent energy shortages by 2016-17. "It won't happen because people can see it coming."

In the meantime, Lambert says the CBI has three urgent priorities: fiscal consolidation, ungumming the credit markets and action on youth unemployment. "We want a stable economy that allows business and consumers to make rational decisions without fearing that the roof is going to fall in."